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Petitioner sold the Livermore residence and adjoining 5
acres for an adjusted sales price of $521,000, and realized a
gain from the sale of $419,000. Under the provisions of section
1034(a), petitioner must recognize such gain to the extent that
the portion of the cost of the Clayton residence, which is
allocable to residential use, is less than $521,000. Petitioner
purchased 51 acres of undeveloped land in Clayton, California for
$380,000. He also spent $146,922 to construct a residence,
garage, and barn. There is no dispute that the Livermore
residence and adjoining 5 acres are to be treated as residential
in their entirety. Moreover, the parties agree that the gain
realized from the sale of the Livermore property, to the extent
attributable to the portion of the Clayton property used for
petitioner's horse boarding and breeding business, does not
qualify for section 1034(a) nonrecognition. However, where the
parties diverge is with respect to the number of acres of the
Clayton property that petitioner used as his residence. In
making an allocation between residential and business use, we
note that neither the statute, nor the applicable regulation, nor
case law provides a specific method for determining what portion
of a realized gain is attributable to the nonresidential use of
the new residence. Section 1.1034-1(c)(3)(ii), Income Tax Regs.,
merely states that "an allocation must be made." Wigfall v.
Commissioner, T.C. Memo. 1982-171.
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